Factories in decline? It’s OK, services will do nicely

BBC: Factories in decline? It's OK, services will do nicely

The Worrying Class in developed countries laments: "We don't make anything any more."

They fear that, as more people find employment in services, their nation loses the ability to provide for itself and gives up the "good jobs" which sustain the middle class.

They obsess about exports and trade imbalances while making a fetish of manufacturing and the blessings it brings to their country. But a quick look at the data shows that the developed world actually makes a great deal of stuff.

The United States alone produces roughly 20% of all the world's manufactured goods. We may not make many toys or cell phones any more, but we do make most of the world's artificial knees and hips, medical scanners and jet aircraft. Those sound like good jobs to me.

Manufacturing fetishists also ignore the fact that many factory jobs were actually not very good jobs at all. …

… I wonder how many of the worriers want their children to grow up to tighten bolts in a factory instead of going to university and getting a job in the service sector?

The worrier's core error is the idea that manufacturing makes "real wealth" while service jobs only move things around.

This is simply wrong. There's nothing less real about service jobs.

Doctors, accountants and personal trainers create value for their customers just like auto workers do.

To quote George Mason University economist Donald Boudreaux: "The value of a dollar's worth of cloth is exactly the same as a dollar's worth of web design. One dollar." …

… This isn't the first time people have made a fetish of one particular industry and tried to stop the economy from evolving in strange new ways. At the beginning of the Industrial Revolution a group of proto-economists known as the Physiocrats took agriculture as their fetish.

They claimed that real wealth only came from working the land and that the new rage for making things was diverting people from the one true economic activity.

I'm sure that if we could go back in time 10,000 years we would find a group of prehistoric economists convinced that real wealth only comes from harvesting food that has grown by itself and that all these people planting seeds are reducing the wealth of the tribe. …

I think there is something else at work here. There is still a widely shared sense that objects have inherent economic value. Since a service entails no material object, it cannot have any inherent value. The value is socially constructed and, therefore, not real.

What this overlooks is that ALL economic value is socially constructed. How much is the Hope Diamond worth to you if you live stranded on a remote island with no chance of being found? Very little. How much is it worth if you live in a modern market-driven economy? A great deal. What matters is the supply and demand according to people who trade in a market … period! No market, no value.

It took centuries for this "price theory of value" to become apparent to ancient thinkers. Even Adam Smith and Karl Marx did not quite grasp it. Many today still have a hard time grasping it, which is a major source of confusion for economic thinking in public discussions.